Psychology of Trading

   If you gave the perfect system to 100 people, less than 10 would actually make money. This is because most people fail owing to the fact that they cannot stick to the rules; they continually second guess themselves or they simply have an unconscious urge to self-destruct! Unless you believe and take these facts seriously, it is unlikely that you will be among the winners. If you have already done some trading, you’ll know this to be true (even if you’re not prepared to admit it) but if you are a complete beginner then take it from me – when you actually start trading, your emotions will be struggling to rule your head.

    Yes, it’s exciting, adrenaline pumping stuff. In order to succeed, you have to reach the stage where it becomes almost a boring business! It’s a good job that we only need actually trade a few minutes a day with Rich Lazy trader, otherwise it would either be far too stressful. When your own real money is at stake, it becomes quite different from trading with play money or paper trading.

    It is said that 95% fail at trading and the reason for this is little to do with systems or money management. The reason most people fail is because they lack the necessary subconscious belief structure to leave the world of 9-5 job mentality and become financially independent. It’s obvious you couldn’t take the average shop assistant and make them a successful managing director of a big multi-national company but people imagine you can take an ‘average’ person and turn them into a successful trader!

    If you have any kind of experience of life and if you’ve learnt anything from it, you will have to admit that our emotions usually get the better of our heads. So, we start trading with a known weakness. In addition, to trade successfully, we have to go against our natural reaction, which is to quickly pocket any profit and do nothing about mounting losses, in the hope that the market will do an about turn. Trading is rather like riding one of those trick bicycles where the handlebars are rigged so they turn the bike in the opposite direction! You have to reprogram your natural instincts if you don’t want keep crashing. More importantly, you have to reprogram your subconscious and I would very strongly suggest you get Success For Traders and read it!

    Much has been written about the fact that fear and greed moves the markets in the short term. Sadly, greed makes us close the trade with less profit and fear makes us hang on to our losses – quite illogical.

    One of the greatest books about trading is Jack Schwager’s ‘Market Wizards’ and his follow up, ‘The New Market Wizards’, in which he interviews numerous successful traders and questions them about their success. I think everyone should read at least the first book for several reasons. Firstly, it will convince you that consistent profits are possible in trading, secondly, it will give you an insight into the minds of successful traders and thirdly, it contains a lot of useful stuff about the psychology of trading.

    In particular, there is an interview with Dr Van K Tharp, a research psychologist who has investigated what brings success or failure in trading and devised a system for improving the results of traders. He states that in the minds of the great traders; money is not important; it is OK to lose; trading is a game; mental rehearsal is important and that they believe they’ve won the game before they start!

    Ed Seykota, who developed the first computerized trading software and who turned $5,000 into over $12,000,000 in 16 years, eloquently describes how all traders actually get what they want out of the market – even the losers. I used to be a psychologist specializing in hypnosis, so I know a thing or two about the subconscious mind. The first thing to grasp is that we can know nothing about our subconscious because, by definition, it is beneath our awareness. Once we discover something, it is no longer in our subconscious mind. The second thing to grasp is that the subconscious exerts a powerful force on our lives and many of ‘our’ decisions are not really ours at all, but those forced on us by our subconscious. Many, many of us have completely hidden traumas from childhood deep within our subconscious and these nag away and cause permanent low-level stress and feelings of unworthiness. If you understand this, it is easy to appreciate that many people don’t really want to succeed and somehow find a way to screw up. Trading provides the perfect opportunity.

    That is just another reason why we must have a clearly defined set of rules and stick to them. The problem is, the market is always throwing up new scenarios and no rules can cover every possibility. Because of this, we have to use some judgement and it becomes all too easy to find a reason to break the rules by closing trades early, by refusing a signal because it looks risky, by hanging on to a losing trade because ‘we thought it was going to turn around’, and so on. Again, Rich Lazy Trader avoids most of this...

    Even I still do it – even with all my experience, even knowing and understanding a great deal about psychology, even after I’ve seen the methods of my system produce winner after winner, even after the statistics prove beyond any doubt that following the rules makes you rich!

    The difference between the winners and the losers is simply how closely we follow rules and common sense and how little we allow our personal psychology and emotion to get in the way of trading. It is extremely difficult, uncomfortable and even painful to go against our psychology. Let me give you an example everyone will understand. How many times in your life have you planned to go up to that woman (or man) and say the things you want to say? How many times have you planned to unload your mind on your boss? When it comes to actually doing things like this, so easy in our daydreams as we plot our strategy, we find that we are often quite unable to put it into practice!

    It’s just the same in trading. We know that when the Rich Lazy trader signal comes on our chart, we should place the trade. But, something tells us that this is one of the times when it’s a bad trade and we find several excuses not to trade. Ten points past the signal, we realise we were wrong and deliberate whether to enter the trade as a latecomer. The market retraces and perhaps we feel that our initial decision not to trade was correct and that the market is going to go in the opposite direction. If we allow our justifications and excuses to get the better of us we may even find that we’ve opened a trade in the opposite direction.

    You need to watch very carefully what mistakes you habitually make. Do you fail to take the trade at the signal? Do you close the trade too early? Do you fail to close the trade and take a small profit when the signals tell you the trade has become too risky? Do you let your losses get too big in the hope of a turn around? Do you chicken out of the trade as soon as you’re a few points down? These are the common mistakes and you can correct them if you are aware of them and apply a little will power and self-discipline.

    You need to set yourself trading goals. It’s easy turning up for work in a regular job – everybody does it and we’ve been indoctrinated since childhood to do it. Working for yourself, by yourself, is another matter. You’ll be at home and home is associated with leisure and with a hundred easily available distractions. For these reasons, you have to make a definite plan to spend time trading. A quick glance at the chart will tell you whether a signal is imminent or not. It’s easy to miss a signal and if you find this happening often, then you should ask yourself if this is a deep-seated fear of trading. Perhaps you don’t really want to trade? Well, I never really wanted to work, but I did! You can overcome this sort of problem if you put your mind to it, but trading just makes some people unhappy. How much do you really want to succeed? It’s all right, you know, to admit that trading is not for you!

    By setting goals financially and time wise, you can substantially increase your chances of success. You also have to think about whether to tell your friends and relatives what you are doing and if you do tell them, do you tell them about your successes and failures? Think carefully before deciding. There are pros and cons on both sides.

    If you have a long run of failed trades, then it may be better to take a few days off and, when you return, to only trade at half your normal value per point. Reduce your fear of losing and you may start winning again. For some people the road to success is a long and painful one.

    Never day trade or scalp when you are stressed or upset in anyway – you will likely mess up! Discipline and mastery of your emotions often means not trading at all. Learn not to become euphoric when you win nor despondent when you lose – stay balanced.

    By way of encouragement, I can only stress that the methods of Rich Lazy trader we use are well proven to work, so follow them carefully . Almost nobody succeeds at trading straight away, regardless of the system they may use. Success requires tremendous discipline and persistence and a true desire to overcome all the obstacles that are most certainly stacked up against us.

    Believe that it is possible. A positive attitude has concrete effects. For those of you who realise the importance of working on creating a positive attitude and effectively opening the pathway to the ‘future you’ who is already a success (after all, an infinite number of universes exists and in one of them you must indeed be a great trader!). The method to achieve this is covered in Success For Traders and is really the missing link that can turn losing traders into profitable traders.